IRS Bars CEOs from Dumping High-Cost Workers on Obamacare

Corporate America was an early supporter of Obamacare, because CEOs thought they could “game the system” by dumping their sickest workers onto state and federal healthcare exchanges that are often subsidized by taxpayers. But in an unexpected financially important ruling, the Internal Revenue Service just notifed employers they will be subject to a tax penalty of $100 a day — or $36,500 a year — for each employee who goes into the individual exchange.

The Business Roundtable, an association of Chief Executive Officers of leading U.S. companies that lobby on public policy issues, quietly backed President Obama’s 2008 election. Since they were already sponsoring self-insured healthcare plans covering 35 million employees under provisions of the 1974 law known as ERISA, the CEOs felt they were immune to the costs of the central provision of the health care law that requires employers of 50 or more workers to offer health coverage to full-time workers.

But more importantly, CEOs also expected to be able to “game the system” to save tens of millions of dollars a year by cost shifting the treatment for their chronically sick workers into an Obamacare exchange policy. “Such an employer-dumping strategy can promote the interests of both employers and employees by shifting health care expenses on to the public at large,” University of Minnesota law professors Amy Monahan and Daniel Schwarcz wrote in a 2010 paper.

Randall Stephenson, CEO of AT&T and Chairman of the Business Roundtable, on January 14th of this year lumped Obamacare in with Social Security and Medicare as “key entitlements” that ought to be sustained and preserved. Stephenson's comment was preceded in the prior week by U.S. Chamber of Commerce chief Tom Donohue declaring that “the administration is obviously committed to keeping the law in place, so the Chamber's not out opposing it.”

Todd Yates, a managing partner at Hill of North Carolina corporate benefits consulting firm Chesson & Woody, was asked for a May 7th Kaiser Health News story about rumors that corporate health plans intended to shift high medical cost workers from the company plan to Obamacare exchanges. He commented, “It's all over the marketplace. Employers are inquiring about it and brokers and consultants are advocating for it.”

Many big employers already intended to shrink the number of specialty care hospitals and doctors in their provider networks and raise co-payments for long-term maintenance drugs. By making the company’s ERISA plan less attractive for employees with chronic illnesses, they planned to incentivize “targeted workers” to voluntarily agree to take a “lump-sum payment to buy a high-benefit Obamacare Platinum Policy for about $6,000 a year." For the corporation, paying for a sick worker’s fixed cost Obamacare policy would substantially beat the average annual cost of $60,885 for a lung cancer patient or the $300,000 for a hemophilia patient.

“The concept sounds too easy to be true, but the ACA has set up the ability for employers and employees on a voluntary basis to choose a better plan in [the] Individual Marketplace and save a significant amount of money for both!” says promotional material from a company called Managed Exchange Solutions. “MES works with reinsurer, insurance carrier and other health management organizations to determine most likely candidates for the program.”

When President Obama was questioned after the Kaiser story broke if corporations had the ability to erode employer-sponsored insurance, he said, “I don’t think that an employer-based system is going to be, or should be, replaced anytime soon.”

The Obama Administration on May 13th raised objections to selective corporate healthcare dumping in an obscure question-and-answer document released “without any comment” by the IRS, supposedly after consulting with other federal agencies. 

It took a couple of weeks for corporations to realize that their best laid plans had gone awry. But Andrew R. Biebl, a tax partner at Clifton Larson Allen, a large Minneapolis accounting firm, said the ruling could disrupt arrangements used in many industries. “For decades,” Mr. Biebl said, “employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs. The new federal [IRS] ruling eliminates many of those arrangements by imposing an unusually punitive penalty.”

CEOs had expected that the “Affordable Care” part of Obamacare was going to be for their economic benefit. With the Roundtable spending $13.9 million on lobbying in 2012 and being ranked as the 20th biggest spender in the United States, they must have put their good name and money behind supporting the healthcare act. Now that the Obama Administration has changed the rules against their financial interests, many CEOs must feel they were the ones being “gamed.”

The author welcomes feedback and will respond to comments by readers


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